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Trusts - UK tax credit on foreign dividends

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Issued20 July 2009

Revised guidance for 2008-09

HMRC Trusts is aware of the current confusion regarding the income tax treatment for trustees of both interest in possession trusts and settlor-interested trusts in relation to the new UK tax credit on foreign dividends. HMRC Trusts is sorry about this and has now taken steps to rectify the position.

Basically, this new credit is an extension of the credit on UK dividends although in the case of foreign dividends it will not apply if:

a) the shareholding is 10 per cent or more, or
b) the company is an offshore fund.

On one interpretation of the relevant legislation, trustees of an interest in possession trust or a settlor-interested trust are not entitled to these tax credits. In practice, however, as we have always done for UK dividends, trustees are given the benefit of the tax credit and this is passed on to the beneficiaries. The SA904 (Trust and Estate Foreign pages) for 2008-09 and its supporting calculation give effect to this and produce the correct outcome.

However, the guidance given on page TFN5 of the SA904 Notes (notes on the Trust and Estate foreign pages) does not follow this approach. This is counter to the way the calculation works and is causing confusion. This guidance has now been withdrawn. A revised version of the SA904 Notes will be available online shortly (unfortunately, we will be unable to change the printed paper version until 2009-10).

There is no need to contact HMRC Trusts if you have already submitted your Trust and Estate Tax Return for 2008-09 which includes an SA904. These Returns can be identified and revised to take into account this change. Where HMRC Trusts has already processed a Return, you may receive a fresh calculation in due course.

What does this revision to our guidance now mean?

If you are the trustee of an interest in possession trust or settlor-interested trust you will automatically be given this new tax credit if you complete box 4.2 on the SA904 – do not exclude all foreign dividends by putting them in box 4.2B. Box 4.2B should only show the amount of the dividends which do not qualify for this credit.

This new tax credit is one-ninth of the amount of the dividend and has to be added to that amount before the tax is calculated. For example, if the dividend is £90 (including withholding tax) the tax credit is £10 and the amount on which tax is charged is £100. In other words, the tax credit is 10 per cent of the grossed-up amount and not 10 per cent of the dividend itself.

The way the calculation works is that all dividends included in box 4.2 are automatically grossed-up to give the non-payable tax credit. Dividends that do not qualify for the credit are included in box 4.2B and are subtracted from the amount in box 4.2. Only the remaining balance in box 4.2 is grossed-up.

Other points:

  • Foreign tax credit relief (FTCR) is limited to the amount of UK tax after it is reduced by any UK tax credits. So for trusts which do not pay tax at the trust rates, FTCR cannot reduce the amount of UK tax due any further.
  • For trusts paying tax at the special trust rates the maximum amount of FTCR that can be claimed after any UK tax credit reduction is 22.5 per cent. This may be restricted to the levels set within the Double Taxation Agreement.

Some practical notes to help you complete the SA904

1. Trusts not liable to Income Tax at the special trust rates

  • Box 4.2 – trustees complete this box to show the total foreign dividend income. The tax calculation will gross this entry up at 100/90 and a 10 per cent credit will be given.

    Example: Dividend £500
    Gross dividend £555 (£500 x 100/90)
    Tax credit £55.50 (£555.x 10%)

    If the total dividend income qualifies for the tax credit and there is nothing included in box 4.2B you do not need to claim any FTCR at box 4.9.
  • Box 4.2B – trustees complete this box to show the amount of dividend income that does not qualify for the tax credit. This is deducted from the amount in box 4.2. These dividends are not grossed up and tax is charged at 10 per cent.

    If foreign tax has been paid (withholding tax shown in column C) then FTCR can be claimed on this income by completing box 4.9.

2. Trusts liable to Income Tax at the special trust rates

  • Box 4.2 – trustees complete this box to show the total foreign dividend income. The tax calculation will gross this entry up at 100/90 and a 10 per cent credit will be given.

    Example: Dividend £500
    Gross dividend £555 (£500 x 100/90)
    Tax credit £55.50 (£555.50 x 10%)

    If foreign tax has been paid (withholding tax shown in column C) then FTCR can be claimed on this income by completing boxes 4.9 and 4.9A.
  • Box 4.2B – trustees complete this box to show the amount of dividend income that does not qualify for the tax credit. This is deducted from the amount in box 4.2. These dividends are not grossed up and tax is charged at 10 per cent.

    If foreign tax has been paid (withholding tax shown in column C) then FTCR can be claimed on this income by completing boxes 4.9 and 4.9A.

R185(Trust Income)

HMRC Trusts is also aware that there may be some confusion regarding the completion of section 7 (foreign income) on the form R185(Trust Income). Here are some notes to help trustees complete this box.

7 Foreign income

The taxable amount is the total of the net amount plus the UK tax paid plus the foreign tax paid and any foreign tax credit that may be due. On a separate sheet, tell the beneficiary what type of income this is, so they can complete the Foreign pages on the Tax Return.

£.......

This is the amount of income before deducting any UK, foreign or Special Withholding Tax - the beneficiary should transfer this figure to column B on the SA106 (individual’s foreign pages).

 

UK tax paid on box 7 income

£......

The beneficiary should transfer this figure to column D on the SA106.

Foreign tax paid on box 7 income

Foreign tax is the lower of the foreign tax actually withheld and the amount of tax to which the trust was liable under the terms of a Double Taxation Agreement.

£......

The beneficiary should transfer this figure to column C on the SA106.

You will see that the current version of the R185(Trust Income) does not have a separate box for the amount of foreign dividends that do not qualify for the new UK tax credit. Please show this figure on a separate sheet when telling the beneficiary what type of income this is. The beneficiary should transfer this figure to box 7 on the SA106. Form R185(Trust Income) will be revised in due course.


About the Author

© Crown Copyright 2009.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.



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Article Published/Sorted/Amended on Scopulus 2009-07-30 10:57:01 in Tax Articles

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